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1. If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met? 2. If most investors expect the same cash flows from Companies A and B but are more confident that Company A’s cash flow will be close to their expected value, which should have the higher stock price? Explain. 3. When is a stock said to be in equilibrium? At any given time, would you guess that most stocks are in equilibrium as you defined it? Explain.
4. Suppose three completely honest individuals gave you their estimates of Stock X’s intrinsic value. One is your current girlfriend or boyfriend, the second is a professional security analyst with an excellent reputation on Wall Street, and the third is Company X’s CFO. If the three estimates differ, which one would you have the most confidence in? Why? 5. What are some actions stockholders can take to ensure that management’s and stockholders’ interest can be aligned? 6. The president of Southern Semiconductor Corporation (SSC) made this statement in the company’s annual report: “SSC’s primary goal is to increase the value of our common stockholders’ equity.” Later in the report, the following announcements were made: (a) The company is spending $500 million to open a new plant and expand operations in China.
No profits will be produced by the Chinese operation for 4 years, so earnings will be depressed during this period versus what they would have been had the decision not been made to expand in the market. (b) The company holds about half of its assets in the form of U.S. Treasury bonds, and it keeps these funds available for use in emergencies. In the future, though, SSC plans to shift its emergency funds from Treasury bonds to common stocks. Discuss how SSC’s stockholders might view each of these actions, and how they might affect the stock price.
7. Edmund Enterprises recently made a large investment to upgrade its technology. While these improvements won’t have much of an effect on performance in the short run, they are expected to reduce future costs significantly. What effect will this investment have on Edmund Enterprises’ earnings per share this year? What effect might this investment have on the company’s stock price? 8. What agency relationships exist within a corporation? 9. What mechanisms exist to influence managers to act in shareholders’ best interests? 10. Should shareholders (through managers) take actions that are detrimental to bondholders? 11. What factors affect stock prices?